Greg Mankiw's Blog

Sunday, August 31, 2008

What to Read

We asked a number of smart people -- inside and outside economics and finance -- to scan their bookshelves for answers. Though there is no single book that can sum up and explain the current conditions, we asked each of our contributors for one book they would recommend to their neighbor, their daughter, their aunt, their barber, priest, rabbi or best friend to help them gain some perspective on these volatile times.

Saturday, August 30, 2008

The Palins: Fans of retirement saving

A friend writes:

Thought this might interest you, since you once blogged about Obama's failure to take advantage of tax-advantaged savings. Here is Governor Palin's financial disclosure form. Turns out her husband is a rather astute saver -- taking advantage of both his company's (BP) 401(k) plan and setting up (pre-1996) a SAR-SEP IRA for his commercial fishing business. He's also nicely diversified in various funds, both domestic and international.

Friday, August 29, 2008

McCain veep pick is not a member...

Palin just signed a bill to suspend Alaska’s gasoline tax until Aug. 31, 2009, actually implementing in her state what John McCain advocated this year on the national scene....The bill, signed Aug. 25, also suspends taxes on marine fuel and aviation fuel for a year.

Sachs on the Digital Divide

The digital divide is ending not through a burst of civic responsibility, but mainly through market forces. Mobile phone technology is so powerful, and costs so little per unit of data transmission, that it has proved possible to sell mobile phone access to the poor. There are now more than 3.3 billion subscribers in the world, roughly one for every two people on the planet....

In Africa, which contains the world’s poorest countries, the market is soaring, with more than 280 million subscribers. Mobile phones are now ubiquitous in villages as well as cities. If an individual does not have a cell phone, they almost surely know someone who does. Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbor’s, or one at a commercial kiosk.

Thursday, August 28, 2008

The Political Divide

Peggy Noonan, one of my favorite political commentators, does a nice job of summarizing a key difference between the political parties:

Democrats in the end speak most of, and seem to hold the most sympathy for, the beset-upon single mother without medical coverage for her children, and the soldier back from the war who needs more help with post-traumatic stress disorder. They express the most sympathy for the needy, the yearning, the marginalized and unwell. For those, in short, who need more help from the government, meaning from the government's treasury, meaning the money got from taxpayers.

Who happen, also, to be a generally beset-upon group.

Democrats show little expressed sympathy for those who work to make the money the government taxes to help the beset-upon mother and the soldier and the kids. They express little sympathy for the middle-aged woman who owns a small dry cleaner and employs six people and is, actually, day to day, stressed and depressed from the burden of state, local and federal taxes, and regulations, and lawsuits, and meetings with the accountant, and complaints as to insufficient or incorrect efforts to meet guidelines regarding various employee/employer rules and regulations. At Republican conventions they express sympathy for this woman, as they do for those who are entrepreneurial, who start businesses and create jobs and build things. Republicans have, that is, sympathy for taxpayers. But they don't dwell all that much, or show much expressed sympathy for, the sick mother with the uninsured kids, and the soldier with the shot nerves.

Neither party ever gets it quite right, the balance between the taxed and the needy, the suffering of one sort and the suffering of another. You might say that in this both parties are equally cold and equally warm, only to two different classes of citizens.

Ec 10 is now in Gen Ed

For those few blog readers who have followed the saga of how economics fits within the new General Education requirements at Harvard, here is the latest news:

The Committee reached a decision on Social Analysis 10: Principles of Economics. When both semesters of this course are taken for a letter grade, it will meet the General Education requirement for Empirical and Mathematical Reasoning or United States in the World, but not both.

My opinion: This is a reasonable compromise among a variety of competing viewpoints.

Wednesday, August 27, 2008

Seeds of a Mess

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee.''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Feldstein on the Housing Market

Marty thinks he has a plan to keep underwater homeowners from defaulting without either burdening taxpayers or abrogating existing contracts.

I have proposed a programme of “mortgage replacement loans” that I believe would stop the downward spiral of house prices. The basic idea is to provide an incentive to stop defaults among those who now have positive equity but are vulnerable to a further price decline. The federal government would offer every homeowner with a mortgage the opportunity to replace 20 per cent of that mortgage with a low interest government loan – up to a loan limit of $80,000 (€55,000, £44,000) – that reflects the government’s lower borrowing rate. Creditors would be required to accept this partial mortgage pay-down and to reduce the monthly interest and principal by the same 20 per cent. That mortgage replacement loan would not be collateralised by the house but would be a loan that the government could enforce by lodging a claim on an individual who does not pay.

With the mortgage replacement loan, people who now have a mortgage equal to 90 per cent of their house value would see that mortgage fall to just 72 per cent of the house value, implying that it would take a very unlikely price fall of more than 28 per cent to push those individuals into negative equity.

Sounds like a free lunch? As far as I can tell, his "mortgage replacement loan" scheme involves tricking homeowners into accepting a deal that is not really in their self-interest. For very little in return, they give up the option of future default. So count me as skeptical.

But I agree with Marty when he says, "This is a difficult problem and there are no easy solutions."

Dynamic Scoring

Recent research on President Bush's tax relief in 2001 and 2003 has found that the lower tax rates induced taxpayers to report more taxable income. In particular, the reduction in the top two tax rates induced taxpayers to report more taxable income—an increase in the size of the tax base—to such an extent that this positive behavioral response likely offset roughly 25 percent to 40 percent of the static revenue loss of lowering the top two tax rates.

Tuesday, August 26, 2008

Volatility is up

Since the beginning of July, there have been six days on which the S. & P. 500 has gone up or down by at least two per cent....Not that long ago, stock-market volatility appeared to be a thing of the past; between the end of 2003 and the end of 2006 there were only two days with moves of two per cent.

Feeling Her Pain

The Democrat National Convention speaker line up will feature a number of “real people” talking about the pain of living in these tough economic times, including an Indiana railroader, a Michigan truck driver, and an ordinary working mother from New York who’s saddled with $24 million in campaign debt.

The woman, who spent that money in an effort to get a better job, saw her hopes and dreams crushed because of sex discrimination in the Democrat party during the Bush administration.

Her husband has no regular paycheck and must often travel hundreds of miles to find work, so the high price of fuel has cut deeply into their monthly budget.

While she has tried to “pull herself up by her own bootstraps” by asking supporters of presidential nominee Barack Obama to pay off her debt, near-recession conditions have kept them from being able to help.

Reports from Jackson Hole

I have skipped the Fed's Jackson Hole event in recent years. (I prefer to spend the waning days of summer on Nantucket with my family.) But reports suggest that this year's meeting was more interesting than average, which, I suppose, is the upside of financial turmoil. Read about some of the sessions here and here.

Does money undermine community?

In a series of experiments, Vohs and her colleagues found ways to get people to think about money without explicitly telling them to do so. They gave some people tasks that involved unscrambling phrases about money. With others, they left piles of Monopoly money nearby. Another group saw a screensaver with various denominations of money. Other people, randomly selected, unscrambled phrases that were not about money, did not see Monopoly money, and saw different screensavers. In each case, those who had been led to think about money – let’s call them “the money group” – behaved differently from those who had not.

When given a difficult task and told that help was available, people in the money group took longer to ask for help.

When asked for help, people in the money group spent less time helping.

When told to move their chair so that they could talk with someone else, people in the money group left a greater distance between chairs.

When asked to choose a leisure activity, people in the money group were more likely to choose an activity that could be enjoyed alone, rather than one that involved others.

Finally, when people in the money group were invited to donate some of the money they had been paid for participation in the experiment, they gave less than those who had not been induced to think about money.

Trivial reminders of money made a surprisingly large difference. For example, where the control group would offer to spend an average of 42 minutes helping someone with a task, those primed to think about money offered only 25 minutes. Similarly, when someone pretending to be another participant in the experiment asked for help, the money group spent only half as much time helping her. When asked to make a donation from their earnings, the money group gave just a little over half as much as the control group.

Why does money makes us less willing to seek or give help, or even to sit close to others? Vohs and her colleagues suggest that as societies began to use money, the necessity of relying on family and friends diminished, and people were able to become more self-sufficient. “In this way,” they conclude, “money enhanced individualism but diminished communal motivations, an effect that is still apparent in people’s responses today.”

Saturday, August 23, 2008

Corporate Taxes Here and Abroad

Friday, August 22, 2008

We're not in a recession

Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.

Wednesday, August 20, 2008

Charlie Rose interviews Austan Goolsbee

Pindyck on Energy Policy

From the MIT News Office (via Mark Thoma), econ prof Bob Pindyck is interviewed about the two candidates' energy policies. An excerpt:

Q: Would either candidate's energy proposals make much impact on energy costs in the short term?

A: Neither of the candidate's plans would have any impact. The one exception would be McCain's proposal to eliminate tariffs on the importation of Brazilian ethanol. It would immediately reduce the cost of ethanol.

Q: How so?

A: We have a tariff on imported ethanol from Brazil, which is made from sugar cane. Ethanol here is usually made from corn. Sugar cane ethanol is about eight times more efficient than that made from corn. By removing the tariff, Brazilian ethanol becomes cheaper and will make ethanol-gasoline blends cheaper.

The favorite sentence of the Pigou Club:

Look, what are going to be needed ultimately is a tax on carbon and a tax on gasoline -- a large one.

Tuesday, August 19, 2008

Dr Doom

Monday, August 18, 2008

Obama's Top Marginal Tax Rate

Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.

Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama's 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.

I suppose that, for thinking about work incentives, one should add on a few percentage points for state and local taxes as well.

Sunday, August 17, 2008

How to Prop Up the Housing Market

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

Friday, August 15, 2008

Toward, and Away From, Bipartisanship

The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.

That is, Senator Obama appears to embrace the principle that dividends should be taxed at a much lower rate than ordinary income. (Recall that this income has already been taxed at the corporate level.) This principle was a fundamental premise behind the 2003 tax bill, signed by President Bush and opposed at the time by a vast majority of Democrats in Congress. If we can now achieve bipartisan consensus to limit the tax burden on corporate capital, that would be a significant step in the right direction.

On an unrelated issue, however, the Furman-Goolsbee piece seems to take a surprising step away from bipartisanship. They take a swipe at Senator McCain's proposal to replace the tax exclusion for employer-provided health insurance with a more flexible health insurance credit. When President Bush suggested a similar idea last year, Furman and coauthors called it "a step in the right direction," and many other commentators agreed. It is too bad that Team Obama is now dissing the proposal.

Wednesday, August 13, 2008

The Obama Tax Plan

Given some confusion on the blogosphere, I want to reiterate that my and Alex' article does not find an increase in average tax rates, or in tax payments, at the income ranges shown in the chart. On the contrary, our article makes clear that Obama's proposed tax cuts would cause average tax rates and tax payments to decline throughout this income range. The point of our article is that Obama's tax cuts are designed in ways that raise marginal tax rates (the extra tax paid on an extra dollar of income) and therefore reduce incentives to earn income. The marginal rate rises because the size of the tax cut falls as income rises. The design of his tax cuts also increases the complexity of the tax system. To avoid confusion, anyone posting our chart should also post (and thoroughly read) our article.

Tuesday, August 12, 2008

The Big Sort

[The researchers] classified counties as politically lopsided if one candidate won by 20 percentage points or more. Their findings are stunning. In the 1960 Kennedy-Nixon election, a virtual dead heat, 33 percent of counties qualified. By 2000, also a dead heat, that was 45 percent. In 2004, it was 48 percent.

Monday, August 11, 2008

Feldstein on Monetary Policy

The European Central Bank and the Federal Reserve are facing similar problems but pursuing different policies. The ECB has been raising interest rates while the Fed has been cutting them. The overnight federal funds rate is now 2 per cent while the corresponding ECB rate is 4.25 per cent. Which central bank is doing the right thing? Or could they both be?...The power of Europe’s unions, its history of hyperinflation and the need to develop credibility for a young institution all justify the ECB’s tough stance. Because the Fed does not have these problems but faces a potentially serious recession, it is prepared to gamble that the weakness in US employment and the general decline in economic activity will prevent a wage-price spiral without further increases in the interest rate.... I think the Fed’s current interest rate strategy makes sense but would be too risky for the ECB.

Sunday, August 10, 2008

Obama's View of Oil Markets

Are oil companies, I ask, more morally culpable than other industries that would not be subject to Obama's proposed [windfall profits] tax?

"Not in the view of most economists," Obama replies. "I'm well aware of the argument (about) singling out oil companies rather than soda pop manufacturers," he says.

Yes, but what does Obama himself believe?

"I think oil companies are amoral. They want to make as much money as they can for their shareholders, which is what corporations do," he says. "The difference is the nature of the kind of outsized profits they make that may have no relationship to their investments or their production. The fact, for example, the shortage of refinery capacity could actually increase their profits so the less they invest the more they make indicates that you are not dealing with someone making widgets out there."

Obama is right about the amorality (not immorality) of oil companies. But he seems to suggest that oil markets are fundamentally different than others. In fact, in all markets, reduced production capacity would increase prices and, sometimes, would increase profits as well. That is why farmers can benefit from policies that induce them to leave land fallow. (I can't say about widgets--empirical studies of that market are hard to come by.)

Maybe Obama is saying that the forces of competition are absent in the oil market and that the deliberate decision by oil companies to keep capacity below competitive levels is the reason for today's high prices. That would be a logically coherent story, but not an empirically plausible one. It is not lack of competition that is keeping oil prices high but, rather, the basic forces of supply and demand. Even if you blame OPEC for noncompetitive behavior, that fact would hardly provide a rationale for taxing domestic oil producers, as Senator Obama is proposing.

In January the President proposed, and in February Congress enacted, a bill that was short-term macroeconomic stimulus. We wanted that stimulus policy to be big, fast-acting, an efficient use of taxpayer dollars, and an effective stimulus to broad-based economic growth. We let taxpayers keep more of their wages, assuming that they would spend some of those refunds, thereby increasing consumption (C). We also temporarily cut taxes on business investment in an attempt to increase (I). The idea is that these two actions would quickly increase GDP. Millions of American workers and families and thousands of firms can react quickly to a change in their financial status.

This strategy appears to be working. We've got evidence from multiple sources suggesting that people are spending some of their stimulus checks, and that this is helping to support increased consumption. It's harder to tell how much firms are taking advantage of the investment incentives, because it's hard to measure that in real time.

In yesterday's Wall Street Journal, Professor Martin Feldstein writes that the stimulus was a "flop". Specifically, he argues that the recent GDP data show that the boost to consumer spending from the rebates was small relative to the overall size of the rebates. He estimates that $12 billion was spent out of a total of $78 billion in rebates paid out by the end of June. The core of his argument is that we didn't get a lot of bang for the buck - only a small bump to GDP for a large loss of revenue for the government.

We disagree with this analysis. First, we think the stimulus bang is bigger than $12 B. Prof. Feldstein assumes that the growth in consumer outlays would have been flat had there been no stimulus. He then observes that consumer outlays actually grew by $12 billion more from Q1 to Q2 than they did in the prior quarter, and attributes that to the stimulus. Many observers think that, without the stimulus, consumer outlays would have grown more slowly in Q2 than in Q1. If this is the case (and we believe it is), then the effect of the stimulus is bigger than $12 billion.

In addition, we have felt only part of the bang so far. The stimulus enacted in February will have ongoing impacts in the upcoming months. Almost all the cash to consumers is out the door, but the resulting boost in consumer spending has not yet reached its full effect. We anticipate that the past stimulus law is continuing to increase GDP in the 3rd quarter, with a diminishing amount in the 4th quarter of this year. Monetary policy works with an even "longer lag" - the evidence suggests that when the Fed cuts interest rates, it takes about a year for half of the economic effect to take hold. So there's more bang left in the remainder of this year from past actions on both the fiscal and monetary sides.

Also allowing people to keep more of their money for one year is better than not doing so at all, so the loss of government revenue is actually a good thing if that money stays in the hands of the taxpayers who earned it, even if we can only get Congress to agree to do that for one year. We agree with Marty that the stimulus would be more effective if we had been able to enact a permanent tax cut, rather than a temporary one. Legislative realities forced it to be temporary.

On the second stimulus question, the following interchange from May 19th is instructive. Our deputy press secretary Scott Stanzel talked with a White House reporter at the "daily gaggle":

Q Scott, is the administration looking any more closely at a second economic stimulus package? The Commerce Secretary was on Late Edition over the weekend, and didn't directly and definitively shoot that idea down.

MR. STANZEL: Well, what's in the second stimulus package that you're talking about?

Q Well, just -- I'm saying that many in Congress say we need a second economic stimulus package.

MR. STANZEL: Right, but what's in that? That's the thing. The idea of the second stimulus has become sort of this catch-all phrase for adding a lot of additional government spending, or doing things that Democratic leaders in Congress may have wanted to do previously, but are now -- would want to sort of put under the umbrella of a stimulus package.

Before last Thursday, there was no second stimulus proposal. Now there's a proposal from the Chairman of the Senate Appropriations Committee, Senator Byrd (D-WV), but we have seen no indications that House or Senate Democratic leaders have signaled support for that proposal.

For more than two months we were asked to comment on something that did not exist. What does exist is pent-up demand in Congress to spend more money, and then to label that spending as a "second stimulus." We anticipate that demand will only increase as we get closer to an election.

Congressional advocates for increased government spending this Fall have been arguing, in effect, that we should expand (G) in the equation above, and that doing so will increase economic growth.

But trying to stimulate short-term economic growth through increased government spending has a few problems:

1. It's slow. - Construction projects take years to plan and build. History shows that only about 27¢ of each dollar is spent in the first year.

2. It's often funneled through States. - Infrastructure spending and increased federal funds for programs like Medicaid result in transfers from the Federal government to State governments. This transfer doesn't actually increase GDP, it just shifts money from one level of government to another. It's more like putting in motion 50 potential stimulus packages, each of uncertain efficacy and speed. Some States might try to spend the funds quickly. Others might shift money around and use the Federal dollars to pay down debt, or wait until their State legislature convenes next year to allocate the funds. There's also a danger that providing States with aid during challenging economic times will encourage states to spend irresponsibly during boom years, counting on Federal bailouts when times are tough.

You can make other arguments for spending more taxpayer funds on roads and bridges, but it's a highly inefficient tool to stimulate immediate economic growth. Many of the advocates for a so-called "second stimulus" know that spending taxpayer funds on roads and bridges is popular with voting constituents.

There's an important philosophical difference between the first stimulus (which was overwhelmingly bipartisan) and current Congressional attempts to increase government spending. The first stimulus proposed by the President looked at the economy as a whole, and tried to design a package that would help spur growth across the entire economy. Ideas being bandied about for a so-called "second stimulus" tend instead to take a constituency-based approach: they try to identify who is hurting, or who is politically powerful, and funnel government funding to them. Advocates then claim that these funds will stimulate broad-based economic growth.

We think that the first stimulus was both more fair and more effective by providing taxpayer rebates to more than 100 million Americans and broad-based business investment incentives to thousands of firms. And we think that there's more economic bang still left from those recently implemented policies.

In summary:

* We think the stimulus is working and increased Q2 consumption and GDP.

* The effects of the first stimulus are not yet complete. Most of the cash is out the door, but we think there will be increased consumption effects this quarter, and a diminishing amount in Q4.

* For many, "second stimulus" is code for "allow Congress to increase politically popular government spending shortly before Election Day, and call it macroeconomic stimulus."

* Increased government spending is slow and ineffective macroeconomic stimulus.

Windfall profits taxes also drive up oil imports because they discriminate against domestic oil producers to the benefit of the Saudis and the Venezuelans—even Barack Obama lacks the power to impose production taxes on foreign oil producers.

To keep things simple, imagine we were considering a small country that takes the world price of oil as given. Then a windfall profits tax on domestic companies discourages domestic production, but has it has no effect on domestic consumption. By contrast, a Pigovian tax at the gas pump reduces domestic consumption but has no effect on domestic production.

In a hypothetical closed economy, production and consumption are the same, so the two plans become closer. But even then they are not exactly the same. A tax on (accounting) profits is not the same as a tax on production. The former may distort the the choice of factor inputs (that is, capital vs labor), while the latter will not.

The Obama windfall profits tax proposal, like the McCain gas tax holiday, shows one thing: Energy is too important an issue in this campaign to let the policy wonks get their way. Both candidates' energy proposals seem to have been written by their political consultants rather than their economists.

Addendum: Obama adviser Austan Goolsbee defends his candidate's plan. Austan's argument is that the windfall profits tax is justified because the oil companies have gotten subsidies in the past. I suppose a similar logic would suggest a new tax on economists who in the past have received government scholarships and research grants and are now enjoying substantial commercial success. Steve Levitt, watch out!

The Present Danger

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs.... The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost.

A Paradox

Saturday, August 02, 2008

Why food prices are rising

There's little doubt that the present spiral in grain prices is closely linked to U.S. and EU policies enacted to boost production of biofuels. The American and European governments subsidize the production of biofuels, limit their import and mandate their use. The exact extent to which these policies have impacted food prices is still a matter of contention, but not even the most enthusiastic proponents of ethanol can deny that by inducing a greater allocation of agricultural resources toward biofuel production, the amount of grain available for food has been reduced. According to the World Bank, while global production of corn increased by 51 million tons from 2004 to 2007, biofuel use of corn in the U.S. alone increased by 50 million tons, thus leaving no margin to satisfy the increase of 33 million tons in global consumption for other uses during the same period. This explains why some respectable experts, such as the former chief economist for the U.S. Department of Agriculture and a top World Bank agricultural economist, have imputed a large proportion of the rise in food prices to the growing use of food crops for fuel.

Wrongheaded biofuel policies constitute only one aspect of the complex and expensive web of protectionist agricultural policies practiced by most developed countries that the WTO Doha Round was supposed to fix. The leading trading countries have repeatedly failed to commit to real reform, with short-term political convenience overriding their own national long-term interests. The latest example of this anomaly is the new Farm Bill approved by the U.S. Congress in May. Instead of reducing agricultural subsidies, this bill provides for bigger and more distorting ones. Even more than the 2002 Farm Bill, this one has eroded U.S. credibility and leadership at the WTO trade talks and given the other key players yet another excuse to evade their own responsibility to make the Round successful.

What do economics and hummus have in common?

Friday, August 01, 2008

More on the GSE Rescue Bill

Congress rejected a proposal that Fannie and Freddie be barred from paying dividends if they are receiving injections of capital from the federal government. This idea would seem to be the first lesson in a course on Government Bailout 101. The government shouldn't be shoveling taxpayer money in the front door while the company is shoveling dividends to shareholders out the back door.

Freddie Mac paid $1.6 billion in dividends last year while Fannie Mae paid $2.5 billion. Both have dividend yields that are many times higher than the norm. Congress chose to protect the shareholders at the expense of the taxpayer.

Political correctness is defined here as "the belief that gender gaps in math and science fields are largely due to discrimination; support for affirmative action; and belief that discrimination is a key cause of racial inequities in American society. Generally, members of this cohort see race and gender as fundamental ."

I notice that the non-PC disciplines appear to correlate with the most lucrative college majors. Some might take this fact as even more evidence that life is fundamentally unfair.

About Me

I am a professor and chairman of the economics department at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.